nri invest in india

Can NRIs Invest in Direct Equities and Mutual Funds in India?

As an Indian staying overseas, do you want to take advantage of the high growth in India? NRIs living in any country, except the USA and Canada, can invest in all Indian Mutual Funds. Despite the recent dull phase in Indian equity markets, the economic prospects continue to be bright and its long-term growth story remains intact.

HOW TO GET STARTED?

All investments made by NRIs have to be in rupees. Mutual funds in India are not allowed to accept investments in foreign currency. For investing in Indian mutual funds, therefore, an NRI needs to open one of the three bank accounts-non-resident external rupee (NRE) account, non-resident ordinary rupee (NRO) account or foreign currency non-resident account (FCNR)-with an Indian bank.

An NRE account is a rupee account from which money can be sent back to the country of your residence. The account can be opened with money from abroad or local funds. An NRO account is a non-repatriable rupee account. An FCNR account is similar to the NRE account, except for the fact that the funds are held in a foreign currency.

The amount that is be invested can be directly debited from an NRE/NRO account or received by inward remittances through normal banking channels. An NRI needs to give a rupee cheque or draft from his NRE/NRO account. He can also send a rupee cheque/draft issued by an exchange house abroad drawn on its correspondent bank in India.

If the investment is made through cheques or drafts, the investor should attach with the application form a foreign inward remittance certificate (FIRC) or a letter issued by the bank confirming the source of funds.

FIRC is a proof of payment received by the individual from outside the country in a foreign currency. It is issued by the bank where you have the account to receive the funds.

Other KYC ( Know Your Customer  ) documents such as Permanent Account Number ( PAN ) and address proof are also to be submitted, just as in case of resident investors. If you do not have PAN card, please click here to get one.

Why can’t NRIs in USA/Canada invest in Indian mutual funds?

Most US-registered mutual fund companies which have India operations do not accept investments from Indians living in the US/Canada as they are bound by the cap on the number of non-resident investors they can take.

Regulators in some countries require fund managers to be registered with them if they are handling more than a certain number of accounts of their residents. For example, the Dodd-Frank Act of the US requires fund managers handling over 15 US-based investors to be registered with the US regulators and follow their rules. To avoid dual regulators, many fund houses have stopped taking investors from these countries.

One way  for USA/Canada based NRI’s to invest in the Indian market is to opt for India-specific funds launched by US/Canada mutual funds or go for Indian mutual fund houses that allow US/Canada based NRIs to invest in their schemes. But for millions of NRIs not residing in the US, investing in Indian stock markets or mutual funds is not a tough proposition.

POWER OF ATTORNEY

To mitigate the risk of market movement, mutual funds allow a power of attorney (PoA) holder to take decisions on your behalf. All that the PoA holder needs to do is to submit the original PoA or an attested copy of it to the fund house. The PoA should have signatures of both the NRI and the PoA holder. The PoA holder’s signature will be verified for processing any transaction.

Similarly, an NRI can make a resident Indian his/her nominee in the mutual fund scheme. An NRI can also be the nominee for investments made by a local resident. Fund houses also allow an NRI to have a joint holding with a resident Indian or another NRI in a scheme.

Power of Attorney is NOT allowed for Investing in Direct Equities. An NRI can have a second holder and nominee for the demat account held with a registered stock broker

HOW TO REDEEM ?

Redemption proceeds is very simple. You have to just sign the redemption form and submit. Redeemed amount are either paid through cheques or directly credited to the investor’s bank account. All earnings will be payable in rupees.

As mentioned earlier, investments made through inward remittances or from NRE/FCNR accounts are fully repatriable. Hence, earnings made by redeeming the units or through dividends are fully repatriable.

However, in case of investments made through NRO accounts, only the capital appreciation is repatriable, not the principal amount.

TAX LIABILITIES

While tax liabilities of an NRI investing in India are the same as that of a resident investor, tax is deducted at source in case of NRI’s.

The key difference between investment rules for NRIs and those for resident Indians in case of both MFs and stocks is tax deduction at source (TDS).

Depending on your country of residence double Taxation benefit will apply. If the Indian government has an Avoidance of Double Taxation Treaty (ADTT) with that country, the NRI will be spared from paying tax twice. For the list of countries with ADTT please click here.

To give an example, India has an ADTT with the US. If an NRI based in the US makes short-term capital gains from equity investments in India, he pays 15% tax. However, the rate for such gains is 30% in the US. The investor will need to pay tax only for the difference in rate. This means he gets a deduction on the tax paid in India from his tax payable in the US.

TAX LIABILITIES OF NRIs

NRI earnings from investments in India is taxed at the rate given below:
 EQUITY FUNDS/STOCKS DEBT FUNDS
Short-term Capital Gains Tax15% As per tax slab
Long-term Capital Gains TaxNil10% without indexation, 20% with indexation
Dividend Distribution TaxNil25% on liquid funds, 12.5% on other debt funds
Total NRI investment should not go beyond 10% of the paid-up capital of a company.

NRI EQUITY INVESTMENTS

NRIs can invest in Indian stock markets under the Portfolio Investment Scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, an NRI has to open an NRE/NRO account with an RBI-authorised Indian bank. An individual can open only one PIS account for buying and selling stocks.

Aggregate investment by NRIs/PIOs cannot exceed 10% of the paid-up capital in an Indian company and a PIS account helps the RBI ensure that the NRI holding in an Indian company does not cross that limit. Each transaction through a PIS account is reported to the RBI.

The next step is to open a demat account and a trading account with a Sebi-registered brokerage firm. An NRI cannot transact in India except through a stock broker.

NRIs cannot trade shares in India on a non-delivery basis, that is, they can neither do day trading nor short-sell in India. If they buy a stock today, they can only sell it after two days.

Short-selling is selling stocks that one doesn’t own in expectation that their prices will drop, and buy them back at lower prices.

NRI SUBSCRIPTION TO INDIAN IPOs

Shares issued through initial public offerings (IPOs) are not covered under the PIS. In case of IPOs, it is the responsibility of the issuing company to inform the RBI the number of shares it is allotting to NRIs.

However, NRIs need NRE/NRO accounts to subscribe to IPOs. The shares acquired through IPOs can also be sold without a PIS account. However, NRIs must furnish their bank details, besides the date of allotment and cost of acquisition of the shares to calculate the tax on any gains they may have made.

Investing in India’s long-term success story is not all that tough after all. All an NRI needs is a right bank account and other documents which even a resident investor will have to submit.

To know more about how we help NRIs, click here.

You can also mail us at helpdesk@zenmoney.com.

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